financial regulatory reform

    Senate Banking chairman Chris Dodd is circulating his new compromise plan for a consumer financial regulator.  The New York Times and Wall Street Journal both summarized the proposal last night, but here is a copy of Dodd's still-rough outline.  

      As compromises go, it could be worse.   It drops the idea of a stand-alone agency that would be devoted entirely to consumer financial regulation, a cornerstone of the White House financial overhaul and of the House-passed bill.  Instead, it would create a "Bureau of Financial Protection" within the Treasury.  Its director would be selected by the President, rather than the Treasury secretary, and it would have its own budget.

You might have thought the era of big no-document liar's loans ended two years ago, when soaring defaults on trippy mortgages nearly destroyed the financial system.

And you might have assumed that no-doc loans had become all but illegal anyway, ever since the Federal Reserve essentially prohibited them in July 2008, when it adopted new restrictions under the Truth in Lending Act.

But you would be wrong. On Friday, I got the following bulletin from Karen Shaw Petrou, the delightful and acerbic co-founder of Federal Financial Analytics, a Washington consulting firm that specializes in financial regulation.

In addition to dissecting policy pronoucenments from bank regulators and the debates on Capitol Hill, Karen reads her incoming junk mail to keep up on the real world.

"Hey -- this is way cool,'' she wrote on Friday, describing a post-card mortgage pitch she had received that seemed like a blast from the good old days of 2006. The offer:

Paul Volcker lays out his argument in the New York Times today for "Volcker rule'' -- President Obama's new proposal to rein in "too big to fail'' institutions by limiting the size of banks and keeping them out of riskier businesses like proprietary trading, hedge funds and private equity.

    But those who suspect that the proposal is window-dressing for the more tepid approach favored by Treasury Secretary Tim Geithner won't get much comfort.

    Volcker starts off well, identifying the core problem of protecting institutions considered too big to fail.  "Public outrage over seemingly unfair treatment is palpable," he says.  It creates "moral hazard'' and it gives the biggest institutions "competitive advantage in their financing, in their size and in their ability to take and absorb risks."  He even invokes Adam Smith, the father of free market theory, as a supporter for keeping banks small.

      But then there is this jolt:

When I was in journalism school many years ago, a professor remarked that business reporters often go through three phases of maturation. At the start, the callous young reporter assumes that all business executives are rich crooks who need to be exposed. As the reporter enters the second phase, he gains access to top executives and discovers that they are much more open, hard-working and smart than they had seemed. In the final phase, the fully-seasoned journalist breaks through to the highest level of awareness: it turns out, there really are a lot of crooks out there.

That’s the feeling I have now. In more than 20 years as a business and economics reporter for The New York Times, I liked nothing more than a good business scandal. But I also considered myself a fan of free markets, opencompetitionand minimal government regulation. I like the dynamism of the marketplace -- the constant turbulence, the risk-taking and the periodic drama of little-known start-ups toppling Goliaths. Microsoft over IBM in personal computers. Google over Microsoft in web-based services. Those things happen, and the public has generally benefitted.